Buyers focus on quality so it's more important than ever to make a firm as attractive as possible for market.
Accountancy practices are selling for about the same average price as they were last year, but buyers are paying more for the very best while low-quality ones have become more difficult to move.
Practices that generate annual revenues of up to A$1 million are selling for between A75 cents and A$1 per dollar of revenue.
“What we’re seeing is a bit more polarisation of the prices that are being paid,” Greg Hayes, director of Hayes Knight, says.
Low-quality practices are marked by low profitability and a poor client base, which often go hand in hand.
These firms tend to deal in compliance and smaller-end work.
“Some of the poorer quality practices are pricing [their services] low to attract work, but they don’t really have any mechanism to get price up to a more sustainable level,” Hayes says
“They’re tending to work long hours to earn their revenue, but there isn’t a lot of profit being produced.”
It’s a bind that firms can find hard to escape. A high dependence on a single client or a few of them can also make a firm less attractive
Another turn-off can be a large chunk of business from baby boomers, who will soon retire and sell their businesses, dramatically reducing the firm’s income, even if they remain clients.
Good practices, by contrast, have profits after partners’ salaries of better than 20 per cent of revenue. “Those practices tend to have good pricing and a better client base,” Hayes says.
Poor practices can be made more attractive, but only if the owners start planning two or three years ahead of the sale.
If your thinking is short term, “the best you can do is some window dressing,” Hayes says. “You’re not going to be able to change the quality of the practice or the value of the practice.”
To make a business more attractive, get rid of problem clients and remove out-of-date plant, equipment and bad debts from the balance sheet well ahead of the sale.
Vendors then need to put themselves in the shoes of the purchaser and ask themselves what a buyer would be looking for and the positives and negatives they would see in their own practice.
Partners should consider whether their firm has a good client spread, and whether they’re providing a broad enough range of services.
Practice financials should show that the business is “happy and healthy” and has increasing revenues, Hayes says.
Buyers will pay a bit more for practices that are adding revenue at 10 per cent to 12 per cent a year, because it suggests there is some “in-built” growth.
Paul Tynan ASA, chief executive of the Kenyon Partners business brokerage, which specialises in the sale, acquisition and merging of financial planning, accounting and insurance firms, recommends that accountants engage a professional to scope and evaluate the business and advise on making it more profitable.
Firms need to make the most of clients and ensure they don’t just see them at tax time.
“They want to get them in and do quarterly reviews and really be their business partner,” Tynan says.
Any firm seeking to attract more than A$1 per dollar of revenue will have to have a range of services for small-to-medium enterprises or corporate clientele, along with serving individuals.
Buyers also look for up-to-date customer records management when assessing potential acquistions, because this will help determine how easy the firm is to take over.
Tynan says demand for accountancy practices remains strong from financial planning firms, which want to access client lists to sell products and advice.
As accounting and financial planning continue to converge, Tynan expects the one-man band accounting firms to merge with, or sell to, other practices, because it is extremely time-consuming for one person to meet the licensing and regulation requirements of both professions.